Economist predicts further fall in OCR

Reserve Bank Governor Graeme Wheeler (Getty)
Reserve Bank Governor Graeme Wheeler (Getty)

The official cash rate (OCR) has remained at its lowest level of 2 percent, but an ASB economist thinks it could drop again by year's end.

The OCR dropped 0.25 percentage points to 2 percent in August, and on Thursday, Governor Graeme Wheeler opted to keep it the same against a backdrop of "volatility in global growth" and uncertainty in commodity prices and politics.

He says the global conditions and low interest rates relative to New Zealand have put upward pressure on the New Zealand dollar exchange rate.

Mr Wheeler says that needs to change, with a decline in the exchange rate needed.

"The trade-weighted exchange rate is higher than assumed in the August Statement. Although this may partly reflect improved export prices, the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector," he says.

House prices remain "excessive", which is a risk for financial stability.

And while the dairy prices have "firmed" since August, the outlook for the full season seems "very uncertain".

Growth in New Zealand's economy is expected to be supported by strong net migration, construction, tourism and accommodative monetary policy, Mr Wheeler says.

ASB economist Nick Tuffley says the bank was widely tipped to keep the OCR the same, but believes further cuts are likely later in the year.

It is predicting the Reserve Bank will drop the rate to 1.75 percent in November, with a "high risk" it'll fall again to 1.5 percent early next year.

"The growth story in New Zealand is positive, and the dairy sector is seeing some light at the end of the tunnel. But the inflation risks remain skewed to the downside, particularly through the ever-stubborn NZD."